The use of excise taxes, aside from any fiscal considerations, may have intentional or unintentional effects upon industrial and social activities. Obviously, these effects cannot be accurately measured, perhaps in no instance, but this does not destroy the fact that these results exist.
May Counteract Protective Tariff. - One use which can be made of the tax is to offset the effects which may be caused by other parts of a fiscal system. A good example of this function is the concurrent use of customs duties and excise taxes which sometimes occurs. Take, for example, the case of a country which wishes to levy an import duty upon a class of goods which is being produced under competitive conditions, both at home and abroad - a feature which it is desired to continue. The levy of the import duty would afford protection to the home producer unless some equalizing burden be placed upon his product. The excise tax can be made to fill such a need.
Suppose the commodity in question be sugar, which is being produced in each of two countries at about the same degree of advantage. One country levies a tax of two cents a pound upon the product from the other country, which is such a handicap that no sugar is imported, the home producers have a monopoly of the situation, the price of sugar will go up, and the government will get no revenue. An excise tax, however, of two cents a pound on sugar produced at home will place an entirely different aspect on the situation. No advantage will be given to either home or foreign producer because of the tax levies, and the government will get two cents a pound from all sugar consumed.
May Affect Progress. - Care should be taken in placing excise duties not to interfere with the natural progress of industry. In order to prevent fraud and evasion, government regulation of the production of taxed commodities may be necessary. This regulation may be of such a nature as to check invention and hinder the adoption of more effective processes of production, and society may suffer more than enough to compensate for the revenue which was gained by the state.
The indirect effect of excise taxes upon industry may also vary greatly. If the tax be levied upon articles which are the basic products for industry in general, the effect will be much more widely felt than if the levy be upon articles which have little connection with industry. The effects of a heavy excise tax upon the production of iron ore, for example, would be felt by nearly all industries, while a tax upon such an article as coffee would have indirect effects of little significance. The taxation of productive materials, such as iron, presents problems which are not found in connection with the taxing of consumers' goods. To place an estimate upon the real effects of the duties is very much more difficult because of the many processes of shifting which are likely to occur. The ultimate burden on the consumer is likely to be greater, moreover, because the tax has been advanced very early in the stage of production, and the individual who has made the payment will seek a rise in price great enough to repay him for having waited to collect the tax from the consumer.
Sumptuary Taxes. - The primary purpose for the levy of excise taxes is often sumptuary. The desire to limit the consumption of commodities which are considered harmful has led to their being taxed, at varying rates, with the expectation that the increased price would lessen the demand. The fiscal aspect is overshadowed in these cases by the expected beneficial effects on the moral and social uplift of the community. The most common example of this class of excises has been found in connection with intoxicating liquors, tobacco, patent medicines, playing cards, and similar articles. The diminution in consumption, however, has not always been what was anticipated, and the anticipated results have often been defeated by the adulteration of the product, so that a less desirable commodity is disposed of at the former price. The use of the excise tax as a sumptuary measure has not been entirely satisfactory.
Care must be taken, in formulating the excise system, to make evasion difficult, or at least not to make it profitable. Evasion is likely to arise when the attempt is made to tax luxuries in proportion to their value. The temptation is at once given for undervaluation of the products, which not only defeats the purpose of the tax, but has a demoralizing effect upon the citizen. The less the incentive to fraud and evasion, therefore, the more salutary will be the social and moral effects of excise taxes.